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Unformatted text preview: 3. True or false: Suppose there are only two firms. It is better to be a quantity leader in a Stackelberg model than a member of a cartel in a one shot market. Use a graph if you want. Part B: 4. A monopolist faces the industry demand Q=400-0.5 p and has constant marginal costs of 8, with no fixed costs. a) What is the optimal price? b) If price increases, from price at a), by one cent, would total revenue be higher? 1 5. Consider the market with two firms where firms are choosing prices p 1 and p 2 and have demands q 1 and q 2 given by q 1 = 40 - 0.5 p 1 + p 2 q 2 = 60 - 2 p 2 + p 1 a) Assuming zero marginal and fixed costs, what are the firms' best response functions, that is best price of firm 1 given price of firm 2, and best price of firm 2 given price of firm one. b) What are the equilibrium levels of output, price and profits? c) Why do firms get different profits? Don't they have the same costs? Please explain. 2...
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- Spring '08